Being under-capitalized can be a quick way to shorten the life of any business—but that doesn’t mean money will solve every business problem. Popular media would have you believe that it takes money (and lots of it) to get a business off the ground. That might be true for some businesses, but many others are able to bootstrap the first few years, while building a solid business credit foundation, so they can borrow the capital they need to fuel growth down the road.
Borrowing money can be a real challenge for businesses under a year old and a pipe dream for idea-stage startups. Lenders want to see a track record and revenue to validate your ability and willingness to make periodic payments. Few lenders will “invest” in your idea and patiently wait for you to get things off the ground.
Bootstrapping Isn’t an Ugly Word—It’s Another Word for Creativity
Creative problem solving is an entrepreneur’s hallmark when faced with a challenge. Figuring out how to get through, under, over or around an obstacle is what they’re good at. The same applies to meeting capital demands during the first year or two.
Too many small businesses think borrowing will solve all the challenges of moving the needle in their young businesses. There are times when it makes a lot of sense, but in that first year or two, focusing on building a strong business credit profile instead of borrowing may even be the better long-term play to build a healthy business. Below are three steps to make borrowing easier in the future.
- Step #1: Be Aware. Levi King, CEO and co-founder of Nav (a free site offering business owners access to their personal credit scores and business credit profiles), suggests the first thing a business owner can do to improve their business’ credit profile is to be aware. “Dive into your business credit profile and make sure you’re paying attention to what’s happening. You’d be surprised at what a difference monitoring your credit profile makes,” says King.
That might sound like an overly simplified first step, but King suggests 41 percent of their customers who regularly monitor their credit were likely to be approved when applying for a small business loan. Understanding your credit is no guarantee, of course, but monitoring is the best way to improve your odds.
- Step #2: Look for Credit-Building Opportunities. Being aware of your business credit profile is a good first step, but looking for opportunities to build a solid business credit foundation is a close second. Finding a $100,000 small business loan in the first few years of business may be a challenge, but there are other ways a business owner can access credit and build their profile.
“Start establishing trade credit with your vendors,” says Peter Bolin, Experian Director of Consulting and Analytics. “Make sure they report to the credit bureaus, like Experian, and make sure you make your payments on time. Apply for a business credit card and make sure you make those payments on time. This will dramatically increase the depth of your credit report so when you do need that $100,000 from the bank or other lender, you’ll be likely to get approved. Additionally, don’t use your personal credit for business expenses. Take the time to establish a strong business credit profile. Consider it an investment in the future of your business.”
- Step #3: Use the Credit You Need and Stay Current. Properly utilizing credit is an important part of running a healthy business, but just because you can doesn’t always mean you should. In other words, use the credit you need, but no more. Borrowing carries with it costs that can impact a business’ profitability.
Successful companies know exactly what they need to borrow, understand exactly what they need, have a complete understanding of what their borrowed funds will cost, can articulate the value the funds will add to the business and know how they will make each and every periodic payment on time.
Of course, there are no guarantees these practices will result in a loan approval, but they will improve your odds of success and provide your business with more options.